Checkbook Diplomacy by Daniel S. Hamilton

What power tools are available to statesmen to advance their national interests? According to the famous Realpolitiker Hans Morgenthau, there are just three: logic, bribes and threats. Threats play a large role in diplomacy and defense, but as we have seen in Iraq and Afghanistan, military intervention costs blood and treasure and often does not do the job. Logic is not always effective when those you are trying to influence are driven by fanaticism, like Daesh, or by sheer determination to hold onto power, like Putin. That leaves bribes or, perhaps more tactfully, the use of ”inducements” and ”incentives” to gain favor from other nations. The carrot rather than the stick. Checkbook diplomacy.

The fact that countries use economic incentives to advance their geopolitical aims is nothing new, but what is newly important is that a host of states are growing in influence primarily by amassing economic power rather than building armies. ”From a resurgent Russia to a rising China and across the Middle East,” notes former U.S. Ambassador to India Robert Blackwill, ”countries are waging geopolitics with capital, attempting with sovereign checkbooks and other economic levers to achieve strategic objectives that in the past were often the stuff of military coercion or conquest.”[1]

Hey, Big Spender

The most striking example of this trend is China’s rise as a leading practitioner of checkbook diplomacy. Beijing does not refrain from saber-rattling on security issues it considers important, such as territorial claims in the South China Sea. Nor does it hesitate to wield the economic stick to beat down countries that oppose its territorial claims, challenge its position on Tibet, or side with Taipei. But sitting on $3.2 trillion in foreign reserves, Beijing has opened its checkbook wide to cultivate countries around the world. It sustains the North Korean regime with food, arms, and energy. It rewards Phnom Penh with billions in “no strings attached” aid for deporting Uighur asylum-seekers back to China.[2] It pledges many billions more in assistance and credits to African countries to develop energy and other resource flows and support Chinese positions in the United Nations. It announces loan commitments to South American and Caribbean nations that are greater than those of the World Bank, Inter-American Development Bank, and U.S. Export-Import Bank combined.[3] It purchases millions in Spanish debt, provides billions of dollars in state financing for key public works projects in Greece and Italy that support Chinese state-owned companies and Chinese workers, including a majority stake in the Greek port of Piraeus, and promises business to eastern Europe leaders in hopes that they will water down EU support for the international arbitration decision against China’s claims in the South China Sea. Shortly after EU member states defied Washington by joining the Chinese-led Asian Infrastructure Investment Bank, Beijing announced it would invest in the EU’s new €315 billion infrastructure fund.[4]

In addition to its efforts to promote the Asian Infrastructure Investment Bank to parallel the Washington-based World Bank, Beijing is using its One Belt, One Road (yi dai yi lu) and Maritime Silk Road strategies to woo nations across Eurasia and the Middle East with promises of lucrative economic and infrastructure development without socio-political conditions. For construction of the China-Pakistan corridor alone, China has pledged investments in Pakistan worth $46 billion over the next ten years.[5]

China’s newfound generosity has eclipsed Russia, which is less known for its carrots than its sticks, for instance periodically shutting off winter gas flows to Ukraine or banning Georgian wine imports as ways to squeeze neighboring countries whose policies aren’t in line with its own. But Moscow has also offered subsidies, loans and aid to Belarus, Kyrgyzstan, Moldova and Armenia and tied neighbors into crucial energy deals. It has paid millions to Pacific Island nations such as Nauru to recognize two regions of Georgia — Abkhazia and South Ossetia — as independent states.[6] It funnels cash to populist movements like France’s National Front to damage Europe’s ”ever closer Union” and dangles the prospects of new commercial deals in front of EU member states in hopes of breaking EU sanctions against it.

Money Makes the World Go Round

The oil-rich Gulf sheikdoms, particularly the kingdom of Saudi Arabia, have long used cash-based diplomacy to try to shape regional events and support figures sympathetic to their worldview. Between 1979 and 1989 Saudi Arabia matched dollar-for-dollar $3 billion provided by the United States to the mujahedeen fighting the Soviet Union in Afghanistan. Riyadh supports Iraqi Sunnis fighting Daesh and those who oppose Shiite political leaders.[7] Saudi Arabia and the United Arab Emirates together supply Jordan with more than $2 billion in annual aid, in part to contain and dismantle the Muslim Brotherhood. Gulf monarchies funneled billions to Egyptian military leaders following the ouster of former President Morsi.[8] Saudi Arabia’s rival, Iran, has also used its oil money to challenge Arab political dominance in the Middle East and extend its influence in Iraq, in Lebanon through Hezbollah, and in the Israeli-Palestinian conflict through Hamas.

Of course Western countries regularly revert to checkbook diplomacy to advance their national interests. Over many decades the United States has used foreign assistance and trade to build and strengthen alliances around the world. In East Asia and the Pacific, for instance, since the end of the Cold War the United States has been actively engaged in supplementing the political and security elements of its regional architecture with an overlapping network of economic partnerships, including bilateral free trade agreements with Australia, the Republic of Korea, and Singapore; and membership in APEC and the Trans-Pacific Partnership.

In recent years Washington has tended to employ economic incentives as tools of state-building in countries whose fragility could threaten U.S. interests. Given this focus, Nikolas Gvosdev has suggested that U.S. efforts might be better characterized as “checkbook security” than checkbook diplomacy.[9] Examples include “buying off” Sunni insurgents in Iraq, funding development projects in Afghanistan, restructuring Pakistan’s debt in exchange for Islamabad’s support in the anti-terror campaign, and helping countries in South America and Africa fight traffickers and organized crime.

The U.S. has also pursued checkbook diplomacy to advance efforts to stop proliferation and secure regional peace arrangements. Via the Nunn-Lugar Cooperative Threat Reduction program, the United States has provided billions of dollars to dismantle weapons of mass destruction and their associated infrastructure, and secure and dispose of nuclear material in the former states of the Soviet Union and forty other countries.

In certain circumstances, economic carrots can nourish peace. Without major financial inducements provided by the United States, the Israeli-Egyptian peace accords signed at Camp David in 1978 would have been unlikely. Before the accords, Israel and Egypt received less than 1 percent of official U.S. military and economic assistance. Since then, both countries became the largest recipients of U.S. largesse. In the western Balkans the U.S. and the EU have prevented conflict from reigniting in part by providing substantial economic assistance. The EU’s Stabilization and Association agreements, and such initiatives as Deep and Comprehensive Free Trade Agreements, have been important carrots in EU efforts to pacify its turbulent neighborhood.

A country may also offer economic carrots to compensate for its lack of capacity or will to project other forms of power. Germany and Japan are prominent examples. Following World War II, both countries faced constitutional constraints on projection of military power and turned their energies to rebuilding their economies. Each became adept at advancing their national interests in the language of economics. When German unification appeared as a real possibility in 1989, German economic payments to the Soviet Union sealed the deal. When the United States assembled a global coalition in 1990 to reverse Saddam Hussein’s invasion of Kuwait, Germany and Japan chose to write checks rather than send troops. When Japan ran into difficulties with China, it lavished billions on ASEAN neighbors to shore up its position. Over the years, both countries have reinterpreted their constitutions to allow a wider range of missions, and have acted to balance their financial contributions with more forthright contributions to peace and security. Nonetheless, in both countries the tendency to reach for the checkbook remains strong.[10]

Sometimes the Check Bounces

The Camp David accords, German unification, Chinese efforts to sideline Taipei — these are all prominent examples of successful checkbook diplomacy. But even in these cases the checkbook did not succeed on its own — in each instance, both logic and threats reinforced the power of the purse.

As a general rule, checkbook diplomacy is unlikely to success unless it is embedded in, and supported by, a broader policy framework. And if the overall framework is off track, more money can be part of the problem rather than part of the solution. In the 1990s, for instance, the U.S. brokered an agreement giving North Korea $4 billion in energy aid and light-water reactors in exchange for freezing and dismantling its nuclear weapons program. The deal could not be sustained, however, and Pyongyang continues its nuclear weapons program today.[11] When the United States and Saudi Arabia bankrolled Afghanistan’s anti-Soviet jihad in the 1980s, they gave little thought to the possibility that they could be funding and arming their future enemies.[12] Despite Beijing’s largesse, its expansive claims in the South China Sea have only heightened its smaller neighbors’ suspicions and fears. African countries have embraced China’s checkbook diplomacy, but feelings of resentment are growing, fed by shoddy construction, environmental damage and predatory practices.[13][14] And while impressive Chinese pledges grab headlines, they often prove hollow.[15]

Lessons to be Learned

Perhaps the greatest triumph of checkbook diplomacy was the Marshall Plan assistance provided by the United States to Europe following World War II. Its great success elicits regular calls for new Marshall Plans — for Ukraine, for the Middle East, for climate change, the list never ends. Most of these appeals, however, are thinly veiled appeals for money. Those who espouse them offer little evidence that they understand the real reasons behind the Marshall Plan’s success. As we approach the 70th anniversary of that plan, it may be useful to recall those reasons.

When war ended in Europe in 1945, the continent had been devastated. Between 1945 and 1948, the United States provided $15 billion in assistance to Europe — a huge amount at that time. By early 1948, however, it was clear that America’s checkbook had failed to revive the continent, which remained traumatized and torn by divisions within and among its societies.

It was only then, as concerns grew about Europe’s future, that American leaders understood that checkbook diplomacy alone was inadequate to safeguard the very U.S. interests and values it had sacrificed so much to defend during the war. It was only then that Washington sent Europe a clear message: the United States would contribute as it could to Europe’s better future — but Europeans had to lead the way. If Europeans wanted American support, they would have to cast aside their divisions and demonstrate how they would build that better future — together. This was the “Plan” in the Marshall Plan: America would fuel Europe’s recovery, but Europeans had to work together to chart the way forward.

The Marshall Plan was a tremendous success — and its legacy continued to pay dividends for ensuing generations. Today, everyone recalls the money behind the Marshall Plan — but in the end, the Marshall Plan amounted to $13 billion — less money than the $15 billion the United States had invested in Europe in the three years after the war. That’s the real lesson: it was not simply money that made the Marshall Plan work, it was the “plan” behind the Plan. Not only did Europeans have to tell the Americans how they would use the funds, they had to do so together. The effect was to galvanize the European movement, to make real and practical what had only been a dream — a true European Community. The U.S. and its partners built on their newfound, common engagement to forge other institutions, including the GATT, the OECD and NATO. The Atlantic Alliance created an umbrella under which European unity could develop, and together these institutions helped produce unparalleled peace and prosperity for their members for close to seven decades.

The lesson of the Marshall Plan and other successful examples of checkbook diplomacy is that the relative utility of the economic carrot, as well as that of other power tools, often depends on the ability of those possessing such resources to harness the full spectrum of power assets available to them, and to combine them in ways that successfully influence outcomes.[16] Whether economic statecraft can serve as an alternative or a complement to hard security depends on the context in which such choices may be posed; whether decision-makers facing such choices are able and willing to deploy a range of power resources, including economic and military instruments, to advance their goals; what outcomes they seek; and the relative power and preferences of other relevant actors.

In short, sometimes you need to employ logic, sometimes you may need to threaten, and sometimes a bribe just might do the trick. But usually you need all three.

[*] Dr. Daniel S. Hamilton is the Austrian Marshall Plan Foundation Professor and Executive Director of the Center for Transatlantic Relations at Johns Hopkins University’s School of Advanced International Studies in Washington, DC.

[1] See Robert D. Blackwill and Jennifer M. Harris, War by Other Means. Geoeconomics and Statecraft (Cambridge, MA: Belknap Press, 2016)

[2] See U.S. Congressman Ed Royce’s comment at http://royce.house.gov/news/documentsingle.aspx?documentid=164495.

[6] Tuvalu and Vanuatu initially recognized the breakaway entities but have since withdrawn their respective recognitions and reestablished relations with Georgia. Nauru is the only Pacific island state that currently has diplomatic relations with at least one of either Abkhazia or South Ossetia.

[10] Japan’s main instrument to deal with the current refugee and migration crisis has been to offer billions in aid to the UN High Commission on Refugees, while keeping its own door closed. Germany, in contrast, has flung its doors open to refugees. See Jeffrey W. Hornung, ”Guaging Japan’s ‘Proactive Contributions to Peace’,” The Diplomat, October 27, 22015, http://thediplomat.com/2015/10/gauging-japans-proactive-contributions-to-peace/

[11] See Elaine Sciolino, ”The World; Call it Aid or a Bribe, It’s the Price of Peace, ” New York Times, March 25, 26, 1995.

[13] The main impetus previously had been the record hike in mineral prices; key minerals like iron rose to over $200/t in 2008, up from the long period of prices as low as in the $20s/t during the 1990s and early 2000s. Prices recovered after dropping off during the global financial crisis, but since 2011 prices for many hard commodities have fallen sharply. The industry forecasts an end to the boom and expects another cycle of stagnation, albeit at prices still much higher than the hard scrabble days of the 1990s.

[14] See Daniel S. Hamilton, ”Asia’s Pivot to the Atlantic: Implications for the United States and Europe,” in Hans Binnendijk, ed., A Transatlantic Pivot to Asia: Towards New Trilateral Partnerships. Washington, DC: Center for Transatlantic Relations, 2014.

[15] Beijing trumpeted the award of its first major European tender, a highway in Poland, as a sign of its rising clout. The project was later abandoned. The Brazil-China Business Council found that only one-third of announced Chinese investments in Brazil between 2007 and 2012 actually appeared; around $44 billion in publicized investments never were realized. See Brazil-China Business Council, ”Chinese Investments in Brazil from 2007-2012: A review of recent trends,” June 2013, available at http://www.cebc.org.br/sites/default/files/pesquisa_investimentos_chineses_2007-2012_-_ingles_1.pdf.

[16] Joseph S. Nye, Jr. offers a clear overview of the different dimensions of power in The Future of Power (New York: Public Affairs, 2011), and The Paradox of American Power (New York: Oxford University Press, 2002). See also Robert Zoellick, “The Currency of Power,” Foreign Policy, November 2012; and David A. Baldwin, EconomicStatecraft (Princeton University Press, 1985).